Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities.
KEC International (Q4FY20 Results Review): Well placed amidst headwinds. Maintain BUY
We maintain BUY on KEC International Ltd. (KEC) with a revised TP of Rs 265/sh (vs Rs 253/sh earlier) valuing the stock at 12x FY22EPS. 4QFY20 financial performance was inline with our expectations. COVID-19 impact towards end of Mar-20 resulted in Rs 5-6bn revenue miss. Whilst FY20 was a miss on ordering, KEC has started FY21E on strong note with Rs 40bn of L1 (largely International T&D) and Rs 7.4bn of new wins. Bid pipeline is strong at Rs 450-500bn including Domestic (Rs 350bn)/ International (Rs 150bn). Balance sheet net D/E is stable at 1.1x though COVID disruptions led to collection miss of Rs 3-4bn let to weak OCF. Same have been realized in Apr/May-20.
In-line performance as lockdown situation evolves: KEC reported broadly in-line numbers with marginal miss in Rev/EBITDA/APAT of 1.2%/4.4%/2.1%. 4QFY20 EBIDTA margin (10.1%) in-line with guidance of ~10-10.5% in near term, but saw 30bps decline YoY/QoQ. ~Rs 5bn billing shortfall due to Mar-20 lockdown led to 9% rev growth vis-à-vis guidance of ~15%. While FY21E growth is difficult to ascertain at this point given the evolving lockdown situation, we have factored in a conservative scenario of 4.4% de-growth in FY21E.
Margins to dip in FY21 on back of fixed costs under absorption on low base: While labor availability will be a key challenge (15k labours at site vs 30k), KEC's is operating at 80% utilization, contract labor migration has also plateaued now. Negative oplev may get partly offset by lower commodity prices, cost saving initiatives and automation. Large part of commodity exposure is hedged hence gains will be limited to new order wins.
International T&D/Railways/MRTS to drive growth in FY21: Railway ramp-up has progressed quite well and may contribute ~30%+ growth for FY21E as well. Civil OB comprising largely of 3 MRTS and 1 RRTS projects will contribute significantly (~Rs 15bn) FY21E onwards. While India-T&D & SAE continue to face headwinds in the near term, Inter-T&D esp. MENA will continue to drive both orders and revenue growth in FY21E. Newly acquired Dubai facility to be levered for securing orders. SAE to remain flat/negative at best in FY21E.
Balance sheet stable, deleveraging required: KEC debt remains in line with FY20 guidance of Rs 22bn. With acceptances consolidated debt is Rs 33.3bn (1.13x net D/E). The quarter also witnessed continuation of the trend of reduction in interest cost on account of higher foreign debt (50%+) in the borrowing mix as a result of robust execution in the international markets. Interest expenses to come down by further 20bps to 2.1% of the rev due to lower incremental borrowing cost in FY21E.
We maintain BUY on KEC. KEC is bidding in Rs 50bn of projects in Middle-East, Rs 90-100bn for Indian Railways and will be beneficiary of TBCB ordering of Rs 150-200bn from PFC/REC/PGCIL during 1HFY21E besides Rs 60bn ordering from SAARC nations like Bangladesh and Nepal. KEC is already L1 in orders worth Rs 40bn (majorly International T&D) and has won Rs 7.4bn new orders for FYTD21. With strong bid pipeline, stable NWC and reducing interest costs (last borrowing at sub 7%), KEC is well placed for re-rating. Key risks (1) Adverse currency/commodity movement, (2) Further delays in capex recovery, (3) Slowdown in government T&D capex, (4) Labor unavailability due to prolonged lockdown.
Shares of KEC INTERNATIONAL LTD. was last trading in BSE at Rs.195 as compared to the previous close of Rs. 192.85. The total number of shares traded during the day was 41942 in over 1354 trades.
The stock hit an intraday high of Rs. 199.95 and intraday low of 192.8. The net turnover during the day was Rs. 8226839.